Construction contracts typically contain clauses whereby the contractor agrees to indemnify and hold harmless the owner or design professional in the event the contractor’s negligence results in a personal injury or property damage action commenced by a non-party to the contract between the owner and contractor. Similar risk shifting generally occurs in contracts between general contractors, on the one hand, and subcontractors and design professionals. However, these clauses often contain a carve out for “the work itself,” meaning that the contractor does not owe the owner indemnification in the event the damage is to the work being performed by the contractor. This carve out is often included because the contractor’s general liability insurance will not cover damages to the work performed by the Contractor. The insurance carrier will not assume risk of damage or of defects to the work being performed, which is more typically assumed by a performance bond surety if one is in place on the project.
The exclusion of damage to “the work itself” is often included in indemnification clauses of construction contracts without much discussion or negotiation. However, it has real world consequences as is made clear in the case of County of Saratoga v. Delaware Engineers, D.P.C. 189 A.D.3d 1926, 139 N.Y.S.3d 381 (3d Dep’t 2020).
The County of Saratoga entered into a design contract with Delaware Engineers and a construction contract with Jett Industries. After the work was completed the County found that certain pumps and tanks, designed by Delaware and installed by Jett, were defective. The County then sued Delaware and Jett under various theories, and Jett and Delaware cross-claimed against each other. As part of Jett’s contract with the County, it was required to indemnify Delaware for personal injury and property damages other than for “the work itself.”
The issue of on appeal was basically whether Delaware’s claim seeking contractual indemnification from Jett was sustainable. The trial court denied Jett’s motion to dismiss. On appeal, the Third Department reversed this holding, and dismissed Delaware’s indemnification claim.
After emphasizing that indemnification claims are strictly construed, the Court noted that the County’s claim was for damages to the pumps and the tanks that Jett had installed, meaning it was damage to the “work itself” that was performed by Jett. Accordingly, Jett owed no contractual indemnification to Delaware for the claims asserted by the County.
The bottom line is that one must be careful about what is included and excluded in indemnification clauses because courts will construe the language carefully so as to not impose risk shifting absent language which clearly creates an indemnification obligation.